Switzerland: Personal Taxation
This tax is levied at federal, cantonal and communal level. Personal income tax is progressive in nature. The total rate does not usually exceed 40% and in most cases, the maximum tax rate is much lower than this. For example, in the Canton of Schwyz, the top rate, inclusive of federal, cantonal/communal tax is approximately 22%.
The basis of assessment is as follows:
- Residents are taxable on their worldwide income other than the income arising from enterprises and real estate located abroad;
- Non-residents are taxable on income arising on permanent establishments and real estate located in Switzerland, but the rate of tax is based on the individual's world-wide income.
Personal income tax rates are progressive, rising to a maximum of 11.5% for incomes over CHF686,000 at federal level, and approximately twice that at cantonal level. There is considerable variation between cantons. Municipal rates are usually a small fraction of cantonal rates.
NB: Payments to individuals of salary or interest on loans at what are judged to be excessive rates are likely to be deemed 'hidden profits' and subjected to a withholding tax at 35%.
In December, 2007, the Swiss canton of Obwalden became the first canton to adopt a flat rate of tax for individual income taxpayers, following a recent cantonal referendum. Obwalden's authorities announced the decision to put in place a flat tax after 90% of the canton's electorate voted in favour of the proposal.
Obwalden had been forced to review its tax system following a complaint from Socialist Party deputy Josef Zisyadis that reforms put in place in January 2006 had created a regressive tax system, where wealthy taxpayers paid a lower tax rate than those on lower incomes, and which was therefore unconstitutional.
Zisyadis succeeded in getting the tax overturned by the Federal Tribunal in Lausanne in June, stating at the time that the court's decision had "put a brake on the fiscal cannibalism between the cantons".
After a referendum in 2005, Obwalden, a tiny mountainous region in the centre of Switzerland, brought in an income tax law which cut tax for those earning more than CHF300,000 per year to 1% from 2.35%. Individuals earning up to CHF70,000 paid 8% and those with income up to CHF300,000 paid up to 6%. At the same time, Obwalden also cut corporate tax to 6.6%, making it one of the lowest rates in Switzerland.
Obwalden's tax reforms also prompted other cantons to respond with tax cuts of their own: cantons Zurich, Valais, Fribourg, Uri and Schaffhausen all reduced tax rates in 2006. This prompted complaints from those on the left that some cantons were engaged in a 'race to the bottom' on taxation that would eventually endanger the viability of public finances.
The cantonal tax system has also come under attack from the European Commission, which is attempting to make Switzerland change aspects of its corporate tax regime designed to attract holding companies to the jurisdiction. The Commission argues that the Swiss tax regime, which allows cantonal governments freedom to set their own tax rates to attract new companies and wealthy expats, breaches the 1972 trade agreement between Switzerland and the EU by distorting trade and competition.